SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 17, 1996
QUALITY SYSTEMS, INC.
(Exact name of registrant as specified in charter)
Delaware 0-13801 95-2888568
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
17822 E. 17th Street, Suite 210, Tustin, California 92680
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 731-7171
Not Applicable
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On May 17, 1996, Quality Systems, Inc. ("QSI") acquired
Clinitec International, Inc. ("Clinitec"), a Pennsylvania
corporation, in a forward-triangular merger (the "Acquisition").
The Acquisition was achieved pursuant to an Agreement and Plan of
Merger (the "Merger Agreement"), dated May 16, 1996, by and among
QSI, Clinitec, CII Acquisition Corporation ("Sub"), a California
corporation and wholly-owned subsidiary of QSI, and certain
principal shareholders of Clinitec (as indicated in the Merger
Agreement). Pursuant to the Merger Agreement, Clinitec was
merged with and into Sub, with Sub surviving as a wholly-owned
subsidiary of QSI. In connection with the Acquisition, the
shareholders of Clinitec (other than QSI) received an aggregate
of 309,846 shares of QSI Common Stock and $4,896,000 in cash on a
pro rata basis as set forth in the Merger Agreement. In
determining the aggregate purchase price for Clinitec, QSI took
into account the value of software companies of similar industry
and size to Clinitec, comparable transactions, and the market for
software companies generally.
In May 1995, QSI acquired a 25% ownership interest in
Clinitec, and with the completion of the Acquisition acquired the
remaining 75% of Clinitec that it did not own. The shareholders'
vote of Clinitec unanimously approved the Acquisition. In
addition, Sheldon Razin, an officer, director and shareholder of
QSI and a member of the Clinitec Board of Directors, abstained
from the Clinitec Board's vote on the Acquisition.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired.
The annual audited financial statements of
Clinitec International, Inc. ("Clinitec")
prepared in accordance with Regulation S-B
consisting of the balance sheet as of
December 31, 1995 and the statements of
operations, shareholders' equity and cash
flows for the period from January 31, 1994
(inception) through December 31, 1994 and
for the year ended December 31, 1995 together
with the corresponding Independent Auditors'
Report and Report of Independent Accountants
are hereby incorporated by reference to the
Registrant's Registation Statement on Form S-1,
File No. 333-00161.
The unaudited financial statements of Clinitec
prepared in accordance with Regulation S-B
consisting of the balance sheet as of
March 31, 1996 and the statements of operations
and cash flows for the three months ended March
31, 1996 and 1995 filed with this report are
listed in the Index to Financial Statements
on page F-1 of this report.
(b) Pro Forma Financial Information.
The pro forma financial statements
for the combined companies filed with
this report are listed in the Index
to Financial Statements on page F-1 of
of this report.
(c) Exhibits
*2 Agreement and Plan of Merger, dated May 16,
1996, by and among Quality Systems, Inc., CII
Acquisition Corporation, Clinitec
International, Inc., and certain shareholders
of Clinitec International, Inc. and certain exhibits.
10.1 Employement Agreement dated May 16, 1996 by and
between CII Acquisition Corporation and Patrick Cline.
*99.1 Text of Press Release dated May 17, 1996.
* Incorporated herein by reference to the Registrant's Current
Report on Form 8-K dated May 17, 1996 and filed May 30, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned hereunto duly authorized.
<TABLE>
<CAPTION>
<S> <C>
Date: June 21, 1996 QUALITY SYSTEMS, INC.
/s/ Robert G. McGraw
Robert G. McGraw
Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Index to Financial Statements
To Current Report on Form 8-K/A
Page
(a) Financial Statements of Business Acquired. No.
----
<S> <C>
Balance Sheet as of March 31, 1996 F-2
Statements of Operations for the Three
Months Ended March 31, 1996 and 1995 F-3
Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995 F-4
Notes to Financial Statements -- March
31, 1996 F-5
(b) Pro Forma Financial Information.
Unaudited Pro Forma Consolidated
Balance Sheets as of March 31, 1996 F-6
Unaudited Pro Forma Consolidated
Statements of Operations for the
Year Ended March 31, 1996 F-8
Unaudited Notes to Pro Forma Consolidated
Financial Statements -- March 31, 1996 F-9
</TABLE>
F-1
<PAGE>
CLINITEC INTERNATIONAL, INC.
BALANCE SHEET
March 31, 1996
(in thousands)
<TABLE>
<CAPTION>
A S S E T S
1996
-------
<S> <C>
Current Assets:
Cash and cash equivalents $ 226
Receivables, net of allowance of $25--
Trade 556
Affiliates 70
Prepaid expenses and other current assets 79
-------
Total current assets 931
Equipment and Furniture, net of accumulated
depreciation of $47 219
Capitalized Software Costs, net of accumulated
amortization of $88 179
Deferred Tax Asset, net 128
Other Assets 11
-------
Total assets $ 1,468
=======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 337
Accrued payroll 58
Deferred revenue 61
Deferred tax liability 29
-------
Total current liabilities 485
-------
Deferred Tax Liability 59
-------
Commitments and Contingencies
Shareholders' Equity:
Convertible preferred stock, no par
value; 1,000,000 shares authorized;
359,382 shares issued and outstanding 985
Common stock, no par value; 3,000,000
shares authorized; 1,078,250 shares
issued and outstanding 941
Accumulated deficit (1,002)
-------
Total shareholders' equity 924
-------
Total liabilities and shareholders' equity $ 1,468
=======
See Notes to Financial Statements.
</TABLE>
F-2
<PAGE>
CLINITEC INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
REVENUES $ 1,313 $ 229
COST OF SALES-HARDWARE 588 108
------------- -------------
Gross Profit 725 121
------------- -------------
OPERATING EXPENSES:
Payroll and Related Expenses 455 167
Selling, General and Administrative 223 97
Research and Development 92 10
------------- -------------
770 274
------------- -------------
Loss from Operations (45) (153)
INTEREST INCOME 4 1
------------- -------------
NET LOSS $ (41) $ (152)
============= =============
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
CLINITEC INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Cash Flows from Operating
Activities:
Net loss $ (41) $ (152)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization 34 12
Common stock issued for services - 38
Changes in--
Accounts receivable (255) (55)
Inventories 128 19
Other current assets 10 (8)
Accounts payable and accrued
expenses 287 14
Customer deposits (616) 56
Deferred revenue 26 -
Other (8) (14)
------------- -------------
Net Cash Used In Operating Activities (435) (90)
------------- -------------
Cash Flows from Investing Activities:
Additions to equipment and furniture (57) (12)
Additions to capitalized software
costs - (41)
------------- -------------
Net Cash Used In Investing Activities (57) (53)
------------- -------------
Cash Flows from Financing Activities:
Proceeds from issuance of common
stock - 5
Proceeds from issuance of note
payable to shareholder - 50
------------- -------------
Net Cash Provided By Financing
Activities - 55
------------- -------------
Net Increase (Decrease) in Cash
and Cash Equivalents (492) (88)
Cash and Cash Equivalents,
beginning of period 718 112
------------- -------------
Cash and Cash Equivalents, end
of period $ 226 $ 24
============= =============
See Notes to Financial Statements.
</TABLE>
F-4
<PAGE>
CLINITEC INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
March 31, 1996 (Unaudited)
1. BASIS OF PRESENTATION
The information set forth in these financial statements of
Clinitec International, Inc. ("Clinitec") as of March 31, 1996 and
for the three months ended March 31, 1996 and 1995 is unaudited. The
information reflects all adjustments consisting only of normal
recurring entries that, in the opinion of management, are necessary to
present fairly the financial position and results of operations of
Clinitec for the periods indicated. The results of operations for
interim periods are not necessarily indicative of the results of
operations for the respective full fiscal year or for any future
period.
Certain information in footnote disclosures normally included in
financial statements has been condensed or omitted, in accordance with
the rules and regulations of the Securities and Exchange Commission.
The information contained in these interim financial statements
should be read in conjunction with the audited financial statements of
Clinitec contained in the Registrant's Registration Statement on Form
S-1, File No. 333-00161, incorporated herein by reference.
F-5
<PAGE>
QUALITY SYSTEMS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS
As of March 31, 1996 (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
QSI CLINITEC Pro
As of As of Forma
March 31, December Adjust-
1996 31, 1995 ments Pro Forma
--------- -------- -------- ---------
(Note 2)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 27,872 $ 718 $(4,896) a $23,694
Short-term investments 1,072 - - 1,072
Accounts receivable, net 4,751 371 - 5,122
Inventories 853 144 - 997
Other current assets 135 73 - 208
--------- -------- -------- ---------
Total current assets 34,683 1,306 (4,896) 31,093
Equipment and Improvements, net 572 173 - 745
Capitalized Software Costs, net 599 202 - 801
Investment in Clinitec
International, Inc. 976 - 11,790 a -
51 b
(11,852) c
(965) e
Other Assets 442 138 830 c 1,410
Goodwill - - 3,054 c 3,054
--------- -------- -------- ---------
Total assets $ 37,272 $ 1,819 $ (1,988) $ 37,103
========= ======== ======== =========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
F-6
<PAGE>
QUALITY SYSTEMS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEETS (Continued)
As of March 31, 1996 (Unaudited)
(in thousands)
<TABLE>
<CAPTION>
QSI CLINITEC Pro
As of As of Forma
March 31, December Adjust-
1996 31, 1995 ments Pro Forma
--------- -------- -------- ---------
(Note 2)
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable 1,706 $ 50 $ - $ 1,756
Deferred service revenue 1,031 35 - 1,066
Estimated costs to complete
system installations 402 - - 402
Customer deposits - 616 - 616
Other current liabilities 1,348 94 - 1,442
--------- -------- -------- ---------
Total current liabilities 4,487 795 - 5,282
--------- -------- -------- ---------
Deferred Tax Liability 84 59 332 c 475
--------- -------- -------- ---------
Commitments And Contingencies
Shareholders' Equity:
Preferred stock - 985 (985) e -
Common stock 56 941 3 a 59
(941) e
Additional paid-in capital 27,148 - 6,891 a 34,039
Unrealized loss on available-
for-sale securities (44) - - (44)
Retained earnings (deficit) 5,541 (961) (8,300) c (2,708)
961 e
51 b
--------- -------- -------- ---------
Total shareholders' equity 32,701 965 (2,320) 31,346
--------- -------- -------- ---------
Total liabilities and
shareholders' equity $ 37,272 $ 1,819 $ (1,988) $ 37,103
========= ======== ======== =========
</TABLE>
See Notes to Pro Forma Consolidated Financial Statements.
F-7
<PAGE>
QUALITY SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year ended March 31, 1996 (Unaudited)
(in thousands, except per shares amounts)
<TABLE>
<CAPTION>
QSI CLINITEC
Year Year Pro
Ended Ended Forma
March 31, December Adjust-
1996 31, 1995 ments Pro Forma
--------- -------- -------- ---------
(Note 2)
<S> <C> <C> <C> <C>
NET REVENUES:
Sales of Computer Systems,
Upgrades and Supplies $ 9,623 $ 1,493 $ - $ 11,116
Maintenance and Other Services 7,109 - - 7,109
--------- -------- -------- ---------
16,732 1,493 - 18,225
COST OF PRODUCTS AND SERVICES 7,929 449 277 d 8,655
--------- -------- -------- ---------
Gross Profit 8,803 1,044 (277) 9,570
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 3,897 1,399 305 d 5,601
RESEARCH AND DEVELOPMENT COSTS 1,567 150 - 1,717
--------- -------- -------- ---------
Income (Loss) from Operations 3,339 (505) (582) 2,252
INVESTMENT INCOME 533 17 - 550
EQUITY IN LOSS OF CLINITEC
INTERNATIONAL, INC. (51) - 51 b -
--------- -------- -------- ---------
Income (Loss) before Income Tax
Provision (Benefit) 3,821 (488) (531) 2,802
INCOME TAX PROVISION (BENEFIT) 1,528 (40) (111) d 1,377
--------- -------- -------- ---------
NET INCOME (LOSS) $ 2,293 $ (448) $ (420) $ 1,425
========= ======== ======== =========
NET INCOME PER SHARE $0.48 $0.28
===== =====
Weighted Average Shares
Used in Calculation 4,788 5,098
===== =====
See Notes to Pro Forma Consolidated Financial Statements.
</TABLE>
F-8
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
(Unaudited)
1. UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
In May 1995, Quality Systems, Inc. ("QSI") acquired a 25%
ownership interest in Clinitec International, Inc. ("Clinitec")
through the purchase of 359,382 shares of Clinitec convertible
preferred stock for $1.0 million in cash. On May 17, 1996, QSI
acquired the remaining 75% of Clinitec by purchasing 100% of the
outstanding shares of Clinitec common stock for $4.9 million in cash
plus 309,846 shares of QSI Common Stock. For purposes of the
acquisition, the shares were valued at $6.9 million, or $22.25 per
share. The unaudited pro forma consolidated balance sheets and
statements of operations give effect on a purchase accounting basis to
the acquisition of Clinitec. The pro forma consolidated balance
sheets as of March 31, 1996 have been prepared by consolidating the
balance sheet of QSI as of March 31, 1996 with the balance sheet of
Clinitec as of December 31, 1995. The pro forma consolidated
statements of operations for the fiscal year ended March 31, 1996 are
comprised of the results of QSI for the fiscal year ended March 31,
1996 and the results of Clinitec for the year ended December 31, 1995.
The pro forma consolidated balance sheets as of March 31, 1996
assume that the acquisition occurred on March 31, 1996. The pro forma
consolidated statements of operations for the fiscal year ended March
31, 1996 assume that the acquisition occurred on April 1, 1995. The
pro forma consolidated balance sheets and statements of operations do
not purport to represent the results of operations or financial
position of the Company had the transaction and events assumed therein
occurred on the dates specified, nor are they necessarily indicative
of the results of operations that may be achieved in the future. The
pro forma adjustments are based on management's preliminary
assumptions regarding purchase accounting adjustments. The actual
allocation of the purchase price will be adjusted to the extent that
actual amounts differ from management's estimates in accordance with
FAS No. 38, "Accounting for Preacquisition Contingencies of Purchased
Enterprises."
The pro forma consolidated financial information is based upon
certain assumptions and adjustments described in the notes to the pro
forma consolidated financial statements. The pro forma consolidated
financial information should be read in conjunction with the
historical financial statements, and related notes, of QSI contained
in QSI's Annual Report on Form 10-KSB for the year ended March 31,
1996 and of Clinitec contained in QSI's Registration Statement on Form
S-1, File No. 333-00161.
2. PRO FORMA ADJUSTMENTS
The following items describe the pro forma adjustments made to
reflect the acquisition of Clinitec:
a) To reflect the acquisition of 100% of the outstanding shares
of Clinitec common stock for $4.9 million in cash and $6.9
million in QSI Common Stock.
F-9
<PAGE>
QUALITY SYSTEMS, INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (Continued)
March 31, 1996
(Unaudited)
b) To reverse QSI's portion of Clinitec's net loss initially
recorded using the equity accounting method due to the pro
forma change to the consolidation method.
c) To record purchase accounting adjustments resulting from the
acquisition of Clinitec based on an appraisal of the fair
value of the net assets of Clinitec as follows:
QSI's investment, including $1.0 million for QSI's
original 25% investment .......................... $12,817
Clinitec's net assets .............................. 965
-------
Excess of purchase price over net assets ........... $11,852
=======
Allocated to:
In-process research and development ................ $ 8,300
Intangible assets relating to existing technology
of $830, net of $332 tax liability ............... 498
Goodwill ........................................... 3,054
-------
$11,852
=======
d) To record amortization of and the corresponding tax benefit
related to the existing purchased technology and goodwill
based on the straight line method over three year and ten year
useful lives, respectively.
e) To eliminate Clinitec's equity accounts and QSI's investment
account.
f) In accordance with FASB Interpretation No. 4, the Company is
required to write-off the $8.3 million in-process research and
development acquired in the acquisition. This write-off will
be reflected in the quarter ending June 30, 1996 and has not
been reflected in the Pro Forma Consolidated Statements of
Operations because it is a one-time non-recurring charge, but
the write-off is reflected in the Pro Forma Consolidated
Balance Sheets.
3. PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING
Pro forma weighted average shares outstanding after the
acquisition of Clinitec assumes as outstanding the 309,846 new shares
issued by QSI to fund the $6.9 million portion of the purchase price
paid with QSI Common Stock, valuing each QSI share at $22.25.
F-10
<PAGE>
Index to Exhibit
To Current Report on Form 8-K/A
Exhibit Page
Number Description Number
------- ------------------------------------ ------
10.1 Employment agreement dated E-2
May 16, 1996 by and between CII
Acquisition Corporation and
Patrick Cline.
E-1
<PAGE>
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is entered into
effective as of May 16, 1996, by and between CII Acquisition
Corporation, a California corporation ("Merger Sub") and Patrick
Cline (the "Employee"), with reference to the following facts:
Recitals
A. Quality Systems, Inc., a California corporation
("QSI"), Merger Sub, Clinitec International, Inc., a Pennsylvania
corporation ("Clinitec"), and certain principal shareholders of
Clinitec have entered into that certain Agreement and Plan of
Merger dated May 16, 1996 (the "Merger Agreement"), pursuant to
which Clinitec shall merge (the "Merger") with and into Merger
Sub, a wholly-owned subsidiary of QSI;
B. Merger Sub and the Employee desire to enter into an
employment relationship pursuant to which the Employee will be
employed by Merger Sub subsequent to the consummation of the
Merger and will perform duties similar to those performed by the
Employee for Clinitec prior to the consummation of the Merger;
C. As a condition to the closing of the Merger and
concurrently herewith, the Employee, Merger Sub and QSI have
entered into a Non-Competition and Non-Disclosure Agreement (the
"Non-Competition Agreement") also effective as of May 16, 1996,
pursuant to which the Employee has agreed to refrain from
competing with Merger Sub and/or QSI or taking certain other
actions as outlined in the Non-Competition Agreement; and
D. It is a condition to the closing of the Merger that
Merger Sub and the Employee enter into this Agreement.
Agreement
NOW, THEREFORE, for good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the
parties hereto covenant and agree as follows:
1. Duties and Performance.
1.1 Employment and Performance. During the Term (as
defined below), Merger Sub shall employ the Employee full-time
and the Employee hereby accepts such employment. The parties
acknowledge and agree that "full-time" shall have a meaning which
is consistent with the meaning of such term in the industry in
which the Company operates and shall include, if reasonably
necessary, more than forty (40) hours per week. Employee shall
devote all of his working hours and time to performing services
for Merger Sub and shall not, during the Term hereof, hold any
position with or perform any services for or on behalf of any
other person in exchange for any form of remuneration whatsoever.
E-2
<PAGE>
The Employee shall have duties and responsibilities as an
employee of Merger Sub that are substantially similar to those
performed by the Employee for Clinitec prior to the date hereof,
subject to such reasonable changes as determined by the Board of
Directors of Merger Sub and submitted in writing to Employee.
Notwithstanding the preceding sentence, Employee shall have a
senior executive position with Merger Sub, with such duties and
responsibilities commensurate with those of senior executive
officers with companies of similar size in the same industry. In
addition, the Employee agrees to faithfully and diligently
perform such reasonable duties and services.
1.2 Performance Location. If the principal business
office of Merger Sub is moved or relocated to a new location
which is outside of the twenty-five (25) mile radius of its
location as of the Effective Date of this Agreement, then
Employee shall be entitled to work from his principal place of
residence so long as Employee does not relocate his principal
place of residence outside of a twenty-five (25) mile radius of
the Employee's principal place of residence as of the date of
this Agreement.
2. No Conflict. The Employee covenants and represents
that he is not a party to any agreement or understanding which
impairs or prohibits his ability to enter into, and perform
services under, this Agreement.
3. Term. The Employee shall be employed by Merger Sub on
a full-time basis for a term of three (3) years (the "Term"),
commencing on the Closing Date (as such term is defined in the
Merger Agreement); subject, however, to earlier termination as
hereinafter provided. The Term shall terminate upon the
Employee's death or Total Disability. For purposes of this
Agreement, "Total Disability" shall mean the Employee's
disability for a continuous period of one hundred twenty (120)
days, if such disability prevents him from performing his duties
for Merger Sub. Upon (i) the expiration of the Term or (ii) upon
Employee's early, voluntary termination of this Agreement, the
Employee shall, on a good faith basis, attempt to be available to
consult with Merger Sub or QSI regarding Merger Sub's and/or
QSI's products, and the payment for such services shall be
mutually agreeable to the Employee and Merger Sub. The
immediately preceding sentence shall survive the termination or
expiration of this Agreement.
<PAGE>
4. Compensation.
4.1 Annual Compensation. Subject to the limitations
set forth in Section 4.2 below, Employee shall receive the
following compensation:
(i) Base Salary. Employee shall receive a base
annual salary of One Hundred Fifty-Three Thousand Dollars
($153,000) (the "Base Salary") payable in installments on
such dates consistent with Merger Sub's payroll procedures;
(ii) Additional Compensation. Employee shall be
entitled to commission and bonuses (collectively "Additional
Compensation") computed upon such formula and payable at
such times as set forth in Schedule A hereto; and
(iii) For purposes of this Agreement, the following
terms shall have the meanings indicated below:
(a) The term "non-QSI Revenues" shall mean total
revenues of Merger Sub (following consummation of
the Merger) less revenues generated from sales to
QSI.
(b) The term "QSI Contribution" shall mean total
revenues of Merger Sub (following consummation of
the Merger) generated from sales to QSI, less
aggregate sales commissions paid on such sales to
Merger Sub's sales representatives.
4.2 Maximum Annual Compensation. Subject to Section
5.2 hereof, during the Term, the Employee's total annual
compensation hereunder (including, without limitation, Base
Salary and any Additional Compensation) shall be capped for each
successive fiscal year under the Term hereof as follows
(hereinafter, as to the maximum annual compensation for each
fiscal year, a "Cap"):
(i) for the fiscal year ending March 31, 1997:
$250,000 (the aggregate compensation received from Clinitec
by Employee from April 1, 1996 through consummation of the
Merger is deemed to have been paid by Merger Sub for
purposes of computing the Employee's total annual
compensation paid for the fiscal year ending March 31,
1997);
(ii) for the fiscal year ending March 31, 1998:
$275,000; and
(iii) for the fiscal year ending March 31, 1999:
$302,000
Notwithstanding the preceding fiscal year Caps on
annual compensation, the compensation limits applicable to the
fiscal years 1998 and 1999 shall be subject to the criteria set
forth in Schedule B hereto. Merger Sub will be entitled to
offset against any future amounts owed to Employee payments made
to Employee in excess of the Caps described above.
<PAGE>
4.3 Employee Benefits. Employee shall be entitled to
participate, subject to the provisions, rules and regulations
applicable thereto, including provisions empowering the Board of
Directors of Merger Sub to modify and/or terminate any such plan
or programs, in all Merger Sub employee benefit plans or programs
(including vacation time, sick leave and holidays) in accordance
with the terms and conditions thereof. The benefit plans or
programs made available to Employee shall be commensurate with
those plans or programs made available to employees of QSI with
similar positions and duties.
4.4 Expenses. In accordance with Merger Sub's
policies established from time to time, Merger Sub will pay or
reimburse the Employee for all reasonable and necessary out-of-
pocket expenses incurred by him in the performance of his duties
under this Agreement, subject to the prior authorization thereof
or subsequent presentment of appropriate receipts and vouchers
therefor.
5. Termination.
5.1 Termination by the Merger Sub for Cause. At any
time, at its sole option, Merger Sub shall have the right to
immediately terminate the Employee's employment hereunder by
written notice to the Employee upon any of the following
occurrences:
(i) the Employee's conviction of a felony or
other serious crime;
(ii) the Employee's gross negligence or willful
misconduct which results in material injury to QSI and/or
Merger Sub;
(iii) the Employee's willful dishonesty towards,
fraud upon, or deliberate injury or attempted injury to, QSI
and/or Merger Sub;
(iv) a material breach by the Employee of any of
the terms or conditions of (A) this Agreement or (B) the
Non-Competition Agreement; provided, that Merger Sub shall
not be permitted to terminate the Employee's employment
pursuant to (A) above without at least thirty (30) days
prior written notice specifying the breach and permitting
the Employee a reasonable opportunity to cure such breach;
(v) If Employee materially fails to perform the
reasonably assigned duties hereunder; provided that Employee
shall be provided with at least thirty (30) days prior
written notice specifying such failure and permitting
Employee a reasonable opportunity to cure such failure;
(vi) in the event that Merger Sub's income from
operations as determined in accordance with generally
accepted accounting principles applied on a consistent basis
("Income from Operations") excluding the QSI Contribution is
not at least Seven Hundred Fifty Thousand Dollars ($750,000)
for the fiscal year ending March 31, 1997; or
(vii) in the event that Merger Sub does not attain
a minimum increase of fifteen percent (15%) in Income from
Operations excluding the QSI Contribution for the fiscal
year ending March 31, 1998 as compared to the corresponding
amount for the fiscal year ending March 31, 1997.
<PAGE>
5.2 Voluntary Termination by the Employee; Payments
Upon Voluntary Termination or Termination for Cause. The
Employee shall have the right to voluntarily terminate his
employment hereunder at any time upon fifteen (15) business days
prior written notice to Merger Sub. In the event that the
Employee voluntarily terminates his employment hereunder (which
shall not include termination due to death or Total Disability of
the Employee or the Employee's termination of this Agreement
pursuant to Section 5.3 due to the breach of this Agreement by
Merger Sub), or this Agreement is terminated pursuant to Section
5.1 above, Merger Sub shall pay the Employee's Base Salary and
provide other compensation and benefits through the date of such
termination only and shall have no responsibility for the payment
of Employee's Base Salary or any other compensation or benefits
to the Employee for any time period subsequent to such
termination. Nothing herein shall affect Merger Sub's obligation
to provide benefits as required by COBRA or any other applicable
federal or state law.
5.3 Termination by the Employee for Breach;
Termination by Merger Sub Without Cause; Payments Upon Such
Termination. The Employee shall have the right to terminate his
employment hereunder upon a material breach by Merger Sub of any
of the terms or conditions of this Agreement; provided, that the
Employee shall not be permitted to terminate his employment
pursuant to this Section 5.3 without providing Merger Sub at
least thirty (30) days prior written notice specifying the breach
and permitting Merger Sub a reasonable opportunity to cure such
breach. Notwithstanding the preceding sentence, if the breach by
Merger Sub results from its failure to timely pay Employee's Base
Salary, Employee may terminate his employment pursuant to this
Section 5.3 upon providing Merger Sub with at least five (5)
business days prior written notice and reasonable opportunity to
cure such breach. In addition, Merger Sub may terminate this
Agreement upon fifteen (15) business days prior written notice
"without cause" (i.e., without reason or for any reason other
than pursuant to Section 5.1 above). If Merger Sub exercises its
rights pursuant to this Section 5.3, Merger Sub shall pay to the
Employee, as his sole and exclusive remedy, (i) the Base Salary,
(ii) Additional Compensation and (iii) any and all employee
benefits (including health insurance) that the Employee would
have received had he remained in the employ of Merger Sub through
the end of the Term. If Employee exercises his rights pursuant
to this Section 5.3, Merger Sub shall pay to Employee, as his
sole and exclusive remedy, items (i) and (iii) in the preceding
sentence that he would have received had he remained in the
employ of Merger Sub through the end of the Term. Any amounts
payable under this paragraph shall be paid according to the same
schedule as would have applied if the Employee had remained in
the employ of Merger Sub.
<PAGE>
6. Successors and Assigns. This Agreement shall be
binding upon and inure to the benefit of the successors and
assigns of Merger Sub, and, unless clearly inapplicable, all
references herein to Merger Sub shall be deemed to include any
such successor. In addition, this Agreement shall be binding
upon and inure to the benefit of the Employee and his heirs,
executors, legal representatives and assigns; provided, that this
Agreement and any provision hereunder shall not be assigned,
transferred or delegated by Employee without the prior written
approval of the Board of Directors of Merger Sub.
7. Entire Agreement; Waivers. This Agreement and the Non-
Competition Agreement constitute the entire agreement between the
parties with respect to the subject matter hereof. No
supplement, modification, or amendment of this Agreement shall be
binding unless executed in writing by all parties. No waiver of
any of the provisions of this Agreement shall be deemed, or shall
constitute, a waiver of any other provision, whether or not
similar, nor shall any waiver constitute a continuing waiver. No
waiver shall be binding unless executed in writing by the party
making the waiver.
8. Severability. All provisions contained herein are
severable and in the event that any of them shall be held to be
to any extent invalid or otherwise unenforceable by any court of
competent jurisdiction, such provision shall be construed as if
it were written so as to effectuate to the greatest possible
extent the parties' expressed intent; and in every case the
remainder of this Agreement shall not be affected thereby and
shall remain valid and enforceable, as if such affected provision
were not contained herein.
9. Notices. All notices, requests, demands, and other
communications provided for hereunder shall be in writing and
shall be deemed to have been duly given upon receipt if
(i) delivered in person; (ii) given by facsimile; (iii) sent by
Federal Express or other nationally recognized overnight delivery
service, charges paid by the sender, or (iv) upon the earlier of
receipt or five (5) business days after being sent by registered
or certified mail, return receipt requested, with proper postage
prepaid, as follows:
To the Employee at: Patrick Cline
Clinitec International, Inc.
Cedar Creek Corporate Center
195A Witmer Road
Horsham, PA 19044
Facsimile No. (215) 957-5493
With a copy to: Buchanan Ingersoll
500 College Road East
Princeton Forrestal Center
Princeton, NJ 08540-6615
Attn: William J. Thomas, Esq.
Facsimile No. (609) 520-0360
To the Company at: Quality Systems, Inc.
17822 East 17th Street
Suite 210
Tustin, CA 92680
Attn: Sheldon Razin, Chief Executive Officer
Facsimile No. (714) 731-9494
With a copy to: Brobeck, Phleger & Harrison LLP
4675 MacArthur Court, Suite 1000
Newport Beach, CA 92660
Attn: Bruce R. Hallett, Esq.
Facsimile No. (714) 752-7522
<PAGE>
10. Applicable Law. The terms of this Agreement shall be
governed by the laws of the Commonwealth of Pennsylvania
applicable to agreements entered into, to be wholly performed in
and among residents exclusively of, Pennsylvania, without regard
to the conflicts of law provisions thereof.
11. Termination of Other Agreements. Upon the effective
date of this Agreement, all other employment, severance or other
similar agreements between the Employee and Clinitec and/or any
affiliate, subsidiary or parent company of Clinitec, if any,
shall immediately terminate and be of no further force and effect
and no payments or other provisions regarding benefits or payment
of any other amounts shall be made thereunder, notwithstanding
any provision to the contrary set forth therein.
12. Liquidated Damages. Employee acknowledges and agrees
that his employment by Merger Sub is necessary to maintain the
goodwill of Clinitec's business as operated by Merger Sub
following the Merger, and that this Agreement is a condition to
consummation of the Merger by QSI and Merger Sub. Employee,
Merger Sub and QSI acknowledge and agree that the business of
Clinitec, as operated by Merger Sub subsequent to the Merger,
will suffer loss of business relations and other goodwill if (A)
Employee resigns or voluntarily terminates this Agreement prior
to its expiration or (B) this Agreement is terminated for cause
under Section 5.1 (except for subsections (vi) and (vii)
thereof), and that it will be extremely difficult to ascertain or
quantify the actual amount of damages or loss suffered by QSI or
Merger Sub as a result of such resignation or termination.
Accordingly, Employee agrees to pay to Merger Sub as liquidated
damages the amounts as specified below if (X) Employee terminates
this Agreement prior to the expiration of its Term for any reason
other than pursuant to and in accordance with the provisions of
Section 5.3 for breach of this Agreement by Merger Sub or (Y)
Merger Sub terminates this Agreement for cause under Section 5.1
(except for subsections (vi) and (vii) thereof) prior to the
expiration of its Term. Employee shall be entitled to pay up to
one-half (1/2) of a required liquidated damages payment in QSI
Stock (to the extent Employee owns sufficient amounts of QSI
Stock) valued at the average of the closing trading price for QSI
Stock over the twenty (20) day period ending on the termination
date.
Liquidated Damages
(i) $2.0 Million if terminated during the first
year of the Term;
(ii) $1.5 Million if terminated during the second
year of the Term; and
(iii) $1.0 million if terminated during the third
year of the Term.
<PAGE>
13. Obligations of QSI. As inducement for Employee to
enter into this Agreement with Merger Sub, QSI guarantees the
full and prompt performance of each of Merger Sub's duties and
obligations hereunder.
14. Assignment of Inventions. All inventions, computer
programs and associated documentation, whether or not patentable,
made or conceived solely or jointly by Employee during the period
of Employee's employment hereunder, which relate in any manner to
the actual or anticipated business, including research and
development, of QSI, Merger Sub or any of their affiliates
(collectively, the "Company") or are suggested by or result from
work assigned to Employee or work performed by Employee, shall be
the property of the Company. By executing this Agreement,
Employee agrees as follows:
(i) Employee will promptly and fully disclose in
writing to the Company all such inventions, computer
programs and associated documentation.
(ii) Employee will cooperate with the Company in
all proper ways to protect the Company's rights therein,
including the execution of papers deemed by the Company to
be desirable or necessary to enable the Company to apply
for, secure, and maintain patent or copyright protection
thereon in the United States and in foreign countries.
[Signature Pages to Follow]
Counterpart Signature Page to Employment Agreement
IN WITNESS WHEREOF, the parties hereto have executed
this Agreement as of the date first above written.
CII ACQUISITION CORPORATION
By: /s/ Sheldon Razin
Its: Chief Executive Officer
QUALITY SYSTEMS, INC.
By: /s/ Sheldon Razin
Its: President
EMPLOYEE
By: /s/ Patrick Cline
Patrick Cline
